Sunday, February 26, 2012

How Kodak succumbed to the digital age

From Der Spiegel (English online edition), here's the fascinating story of Kodak, one of the most recognizable companies of the 20th Century:

If you were to turn back the hands of time to almost any point over the last 132 years, you would come across Kodak without having to look for long -- and often without even realizing it. The red-and-yellow logo and yellow film boxes were as much a part of everyday life in the West as Coca-Cola. Indeed, film made in Rochester was the universal storage medium for pictures from weddings, holidays and vacations long before the dawning of 12-megapixel digital cameras and wafer-thin smartphones.

All around the world, people immortalized themselves on Kodacolor, the first "true color negative film," introduced in 1942. Later, they put Ektachrome slides in gray plastic frames and flimsy carousels. Eventually, they would use Kodachrome, the film its creators claimed could see "better than the human eye" and which, according to the Paul Simon song of the same name, "makes you think all the world's a sunny day."

Kodak was at the heart of all the world's images. Company founder George Eastman was hailed as the Steve Jobs of his era, and Kodak was its Google. In 1900, Eastman gave the world's consumers the "Brownie," the first relatively portable photographic camera for the everyman. The Brownie would change our view of the world forever and spawned an amazingly novel -- and profitable -- business idea: While selling its cameras cheaply and in bulk, Kodak made a killing by developing the film that went in them.

This ingenious model paid off handsomely for exactly a century and, in 1999, the company enjoyed record profits of $2.5 billion. For one, last time, the company could look back with satisfaction on a century of having decisively shaped the world of images.

If you're young, you might have a hard time understanding how dominant Kodak was. As the article suggests, think Google, maybe. Kodak was everywhere. Even those famous pictures from the Moon Landing were taken on a Kodak camera on Kodak film.

Ironically, Kodak developed the world's first digital camera, in 1975. And that's where this really gets interesting, because Kodak knew that it was doomed - that its business model was doomed, at least - as early as 1979.

Back in 1979, he [Larry Matteson] summarized the prospects for digital photography in a series of rapidly rising exponential graphs. The graphs showed that -- inevitably, if not immediately -- all the products Kodak had been successful at selling -- film, photos and cameras -- would switch from analog to digital by 2010 at the latest. The world as Kodak knew it was destined to vanish, and its business would shrink to practically nothing. Almost overnight, Kodak found itself heading down what seemed like a one-way street to oblivion.

From an objective point of view, there were two particular things that the company did extremely well: First, Kodak was a world leader in organic chemistry. And, second, thanks to its unparalleled experience in making films, it had become expert in coating surfaces of all kinds with extreme precision and at lightning speed. "But you can already see where that was heading," Matteson says. "Both were qualities that were no longer needed in the production of digital images."

After focusing on chemicals and film for several decades, it would have probably been impossible -- if not insane in business terms -- for Kodak to try to reinvent itself as an electronics company. What's more, its film business was still booming in the late 1970s and promised to bring in outstanding profits for many years to come.

In addition, it was easy to figure out that the meager margins of the digital market could never hope to match those of analog film or to keep a company like Kodak above water. Thus, as many as 30 years ago, Kodak seemed to have one of two choices: to commit suicide right away or to put it off until later.

That was in 1979. Kodak filed for bankruptcy this January, more than 30 years later. They pretty well knew that it was coming.

Now, other companies have reinvented themselves. Heck, Berkshire Hathaway used to be a textile manufacturing company. Apple is another great example, though they didn't have to make such a wrenching change.

But how do you make a dramatic change in a wildly successful, hugely profitable company. The writing was on the wall, but the end was some years off. And besides, what would you do? Kodak had a great deal of expertise in what it did, and no expertise at all in anything else.

Every new board came up with a different strategy. Kodak invested in the hope of expanding its chemicals division into the pharmaceuticals business. It also spent a lot of money trying to dominate the market in digital printing -- a plan that was pursued, abandoned and then revived once again.

Bad luck also played a part in the company's eventual demise. Kodak tried extremely hard to survive the competition between analog and digital technology. It scaled back its film production in as controlled a manner as possible, while ratcheting up its digital capacities. As a result, Kodak was the leading manufacturer of digital cameras on the American market as recently as 2005.[my emphasis]

Unfortunately, the next technological leap was just around the corner, and the first smartphones were already replacing digital cameras. Indeed, people soon stopped using normal cameras to take photographs, preferring instead to snap pictures on their phones. This, in turn, triggered a race to the bottom in terms of camera prices and, by 2007, Kodak had slipped to fourth place on the American camera market. Three years later, it was seventh. One by one, Canon, Sony, Nikon and all the other camera manufactures overtook Kodak. Their products were just as good or better, and they looked nicer, more colorful and fresher.

In Tokyo, managers at the rival company Fujifilm came upon the idea of converting their chemical business into a cosmetics one. But Kodak executives couldn't come up with a radical solution that could save their company. Other similarly outside-the-box suggestions -- like using their outstanding coating technology to print wallpaper or to manufacture sandpaper or Post-it notes -- were only given brief consideration before being dismissed as undignified. Rochester was gripped by an understandable but still fatal attitude: They had given the world pictures from the surface of the moon, they reasoned, so someone else could give it wallpaper.

I think this is a fascinating story, myself. Imagine that you run one of the most famous companies in the world, and one that's extremely profitable. But your own invention is going to make all that worthless in 30 years or so. What do you do?

The people who ran Kodak weren't stupid. They might have had too much pride for their own good, but even that is hard to say. Wallpaper wasn't going to make them those kinds of profits. And there were wallpaper companies already.

In fact, any other business model would put them in direct competition with established businesses. And those businesses had expertise which Kodak would necessarily lack. Of course, they could always buy another business and get the expertise that way.

But they actually made a bold move into digital cameras and apparently did quite well, at first. Let's face it, those Asian "tigers" - Japan (the first), Singapore, Taiwan, South Korea, China, etc. - have pretty well stomped American manufacturers, and especially in electronics. Is there anything electronic still manufactured in America? That would have been tough enough even by itself, but then came smartphones.

As I say, I think it's a fascinating story. And if you're a businessman or an investor, it's probably an important one. But I don't know what the lesson is. The bigger they are, the harder they fall?

No comments:

Bill Garthright

I'm a skeptic. I think it makes sense to have reasons for what I believe, so I apportion my belief to the evidence. You're welcome to disagree. Please, tell me I'm wrong. I probably don't agree with anyone about everything. Why should disagreement be a problem? Check the Pages section below for series posts and links to book reviews and game posts, as well as contact info. I have varied interests, so there's a little bit of everything here. I encourage you to look around. - Bill

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